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Governance and Merger Accounting: Evidence from Stock Price Reactions to Purchase Versus Pooling

41 Pages Posted: 14 Sep 2007  

Francisco de Asis Martinez-Jerez

University of Notre Dame - Department of Accountancy

Abstract

This paper examines the effect of corporate governance on investor reactions to accounting choice in the context of accounting for business combinations. Using a sample of 324 recent stock swap acquisitions I find that, contrary to practitioners' belief that capital markets penalize purchase accounting, the opposite appears to be true; there is a negative and significant differential market reaction of approximately 4 percent for acquiring firms that announce pooling transactions. This return differential declines to negative 8 percent for firms with ineffective corporate governance. These findings are consistent with capital markets interpreting the choice of purchase accounting as a signal of management's confidence in the likelihood of a successful merger. This signal is particularly relevant when corporate governance is considered ineffective.

Keywords: Corporate Governance, Business Combinations, Mergers, Pooling of Interests, Timely Loss Recognition

JEL Classification: G12, G14, G34, M41, M44

Suggested Citation

Martinez-Jerez, Francisco de Asis, Governance and Merger Accounting: Evidence from Stock Price Reactions to Purchase Versus Pooling. European Accounting Review, Vol. 16, No. 4, 2007. Available at SSRN: https://ssrn.com/abstract=1013349

Francisco de Asis Martinez-Jerez (Contact Author)

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

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